← The Master Investor Podcast with Wilfred Frost
The Master Investor Podcast with Wilfred Frost
Thomas Peterffy: Trump Is Smart & Rational, How I Built a $100bn Business, and Why the Bubble Is Still to Come
00:30:40
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- [00:00]
A
I grew up in horrible conditions in socialist Hungary after the Second World War, but I basically consider that as a lucky break because that gave me a unique insight into the virtues of capitalism and the evils of socialism. It's very, very simple. You just try to give a much better deal to your top target customers than they can get anywhere else. And that's the secret to business, right? Any business. It was very clear to me that people were misunderstanding Trump and his idea about instituting tariffs because I thought that his idea was completely rational. He's not a madman, he's a smart guy. We are not in a bubble yet, but we will be.
- [01:00]
B
Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of some of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. We're recording this on Thursday 31st July. My guest today is a titan of markets globally, particularly in the United States, a digital trading pioneer who founded interactive brokers in 1978 and has built it to sit at a market cap of above $110 billion today at an all time high, still owning some 75% of the company he founded decades ago. I am delighted to welcome the chairman of Interactive Brokers, Thomas Petfi. Thomas, great to see you. Long time no speak.
- [01:57]
A
Great to see you too. That's true. We have been not speaking for some time, right?
- [02:05]
B
We have indeed. And obviously I left CNBC three and a half years ago and I have to admit the growth your company has had since then slightly passed me by until I was preparing for this interview. Back when we used to talk, I had in my mind IBKR was a 20, $25 billion market cap. It's up four or five times since then. What an amazing run. We're going to go deeper into the company in a moment, but just quickly, what has driven the last three or four years?
- [02:38]
A
So it is not that the company has done anything different. It is Wall street that suddenly begun to recognize Interactive Brokers for what it is. In other words, our growth has been very, very steady, between 25 and 35% roughly for many, many years. And it is just chugging along at the same rate. And for a long time we were ignored and suddenly we are extremely popular. It's hard to understand why.
- [03:14]
B
Well, congratulations. And I want to go a bit further back because some of our listeners, those in the US but, but certainly those here in the UK don't know your, your backstory. You arrived in America for the first time from Hungary, age 21, and I think I'm right in saying you didn't speak English at that point. And obviously I did not.
- [03:34]
A
I did not, and I still don't speak it too well.
- [03:39]
B
No, that's not fair. You speak it better than, than I do. But, but, but the key point being that I wanted to get to obviously you, you know, you're worth, you know, 75 billion or so today. You built $100 billion plus company. Could you have done that in any country other than America?
- [03:57]
A
I doubted. No, no, that's not, not very. No, not possible. No.
- [04:04]
B
What I wanted to pick up on because of that is that you've spoken up about capitalism against socialism and communism that you experienced in your youth in Hungary many times. And my question on that is the fact as an American today, you need to speak up about the benefits of capitalism. Do you think that America needs to be reminded of the benefits of capitalism today or not?
- [04:32]
A
Absolutely. Absolutely. Yes. I, it's. It's a very, very sad situation that we have now among many young people. And it is basically, I think it's, it's the, it's the issue of the people who are going, go into teaching. They, they are not very ambitious, they are not very practical, and they are envious of the people who go into the productive businesses and do a lot better. And there is not much of a transformation between academia and business. I think there should be more movement there and that would be better.
- [05:26]
B
Do you think that things have gotten too unequal, though, in America?
- [05:34]
A
Well, yeah, I mean, but that is due to the technology. So technology, as it evolves nowadays, it favors the concentration of businesses into a few hands. I think that probably will change at some time in the future, but. So we're all exposed to the technology that is prevailing at any one time in society. If I may go back, I grew up in horrible conditions in socialist Hungary after the Second World War. But I basically consider that as a lucky break because that gave me a unique insight into the virtues of capitalism and the evils of socialism because it gave me an opportunity to see the west and capitalism from the outside. Behind the Iron Curtain, we were deprived of any information, current information, because there was censorship. So we couldn't read anything because the state was very worried about the people behind the Iron Curtain finding out that there is a better life on the other side of the Iron Curtain. So we were prohibited from reading anything other than we were allowed to read the classics. And I basically learned about capitalism from the classic English and French writers. So like Dickens and Balzac. And Zola. And that gave me a very unique view of how capitalism worked. So those books taught me that a successful business is basically based on fulfilling the needs of other people better and cheaper than other people do it. Success is always based on using the latest technology. I was very lucky to become a computer programmer when I came to America in the 60s. And that was the technology that I decided to, I will use to do whatever business I get into.
- [08:16]
B
And obviously you got into applying that computer science to stock trading and were one of the digital trading pioneers. As I said, it's more commonplace now. The growth in your accounts has been steady for decades, but over the last five years in particular, you've signed up about 35% new accounts per year. You mentioned there the, the fact of delivering the best for your customers at the lowest cost. That is really your guiding principle, right? It's, it's. If you give them the best possible, it's very simple.
- [08:53]
A
It's very, very simple. You know, you just, you just try to do. Try to give a much better deal to that, to your target customers than they can get anywhere else. And that's the secret to business, right?
- [09:10]
B
Any business, I guess when you grow that quickly as you have the last five years, people wonder how long it can last. But what I think is striking is that you have, I think I'm right in saying about 5 million customers. But someone like Charles Schwa, 4.
- [09:30]
A
We have only 4 million customers. 4 million customers, that has 10 times as much as we do.
- [09:37]
B
Right. So there's a lot of growth for you.
- [09:39]
A
Six times as many as we do. So they have a lot more customers, but our customers. So as I said, our customers are not really retail. Our customers are professional traders. So our customers are the people who work at large banks and trading firms. And even though we do take, we do take anybody, anybody who wants to come onto our platform can do so. But the platform is tailored for sophisticated individuals who understand the market structure and understand that the, the importance of excellent executions and low interest rates that we charge and high interest rates that we pay on deposits. Because on the long. I mean, right now we are going through a very strong bull market. But on the long run, performance has to do with getting your cost down.
- [10:47]
B
So let's. You said we're in a bull market. Let's talk about it. You correctly called for a bounce after Liberation Day back in April when the tariffs were initially announced. So kudos on that call. Why did you think we would do a bounce back then?
- [11:07]
A
So it was very clear to me that people were misunderstanding Trump and his idea about instituting tariffs because I thought that his idea was completely rational. He's not a madman, he's a smart guy. Maybe his delivery has something, maybe that should be changed, but he's a good intentioned person and he's very, very smart. So it is not the idea that he was out there to destroy the economy of the United States. That was just crazy. And these people, all the large institutional investors were in echo chamber complaining to each other, oh my God, what's going to happen here? And so it was clear to me that that was I. It just so happens that I, I was on Television on 6 April and the market was really cratering and it was around 38, 48, 48, 50 was on the S and P when I said that this is the greatest buying opportunity of my lifetime. And it just happened, that just happened to be the low point of, of, of the market. This, that after.
- [12:39]
B
So obviously we've rallied very hard since then. Thomas, do you now worry in the other direction or not? Do you think we're.
- [12:46]
A
I'm not worried because I just see smooth sailing going forward for quite some time.
- [12:54]
B
What about AI? Do you think that we're in a bubble there or not? The big AI stocks?
- [13:01]
A
Not yet. We are not in a bubble yet, but we will be. So basically, if you look at what happens in a bubble, what happens is that there is a new technology and everybody believes that the fallout, the result of the new technology will be incredible and it's coming very, very soon, but then inevitably turns out that it is not coming. Guess who, as you expected, and people get disappointed and they suddenly don't like anything having to do with the new technology and they just trash the whole thing. But that's not true. The new technology is always, eventually going to become very, very useful. Now, as far as AI is concerned, where the participants behavior can be quite correctly predicted, AI is fantastic. And if you look at material sciences and biology and chemistry, where the participants are basically molecules and atoms, their behavior can be statistically extremely precisely predicted. So I think the useful fallout for AI in the near term we come in biology and material sciences and those areas. So general AI, general intelligence, I think that's far away.
- [14:39]
B
But do you get worried by the size of the debt and the deficit or not?
- [14:45]
A
That depends. In my mind, that depends on the political situation. So if the country is politically peaceful, then all the deficit means is that the value of the dollar continues to deteriorate and so what cost a dollar today will cost $10 30 years from now. That's okay. That's what happened in the last 50 years, since I last 60 years since I came to America. But as long as the country is politically stable and the United States appears to be more stable than any other country in the world, I think it doesn't matter. If political instability begins, then that is a problem because then the deficits, of course, are unmaintainable.
- [15:58]
B
There's sometimes a debate in the marketplace about the smart money versus the dumb money in inverted commas. Obviously you've explained the base of your client base, but you have a lot of retail clients too. What do you think about that debate? When people try and suggest institutional is smarter than retail or not, do you think that there's legitimacy in that or not?
- [16:22]
A
I think that there's too much generalization. So I'm talking about individual customers. So some individuals are moms and pops who know nothing. And there are people, unfortunately, who go out and try to take advantage of them and they lose money. On the other hand, there are institutional traders who also don't know too much. So it's basically the people in between the individuals who do hard work, who inform themselves, who analyze stocks, and who really try to predict the future. It's all about predicting the future. There are reasonable scenarios of what can and cannot happen in the future and which companies, trying to figure out which companies will be the best, will be able to take advantage of what the future is going to look like.
- [17:36]
B
Just a couple more questions on the broad markets, if that's all right. What about ETFs and concentration risk? Is that something that is brewing a problem for down the line?
- [17:51]
A
It is possible that there'll be problems with ETFs because it's sort of an and investing on autopilot and. But I wouldn't really worry about that on the short term, but on the longer term there it could be a problem, but not yet.
- [18:18]
B
In terms of crypto, is that something that you are moving into in a more meaningful way, that you're happy to be a follower?
- [18:29]
A
Well, we have to move into it because the world is moving into it and it cannot be left behind. So even though I'm personally not a crypto enthusiast, I completely believe that whatever the world is doing, we have to service our customers. So that's what we do.
- [18:55]
B
Why aren't you a crypto enthusiast?
- [18:58]
A
Because I have trouble identifying the volume and maybe Bitcoin is okay, but I mean, it's difficult to conduct business in because it's too Consuming of power and technology and other coins. I mean stable coins are fine, that's simple, but that's basically equal to the dollar. So it's not really crypto, it's just blockchain.
- [19:40]
B
One newer trend that I think you're quite bullish on is prediction markets. The likes of polymarket, for example, have taken off. And this is a service you offer as well, Nat?
- [19:52]
A
Absolutely. So for a long time when I went into this business, many, many years ago, I went into the options business. And options have all to do with probabilities, probabilities of future stock prices. And once you realize that, then you realize that in our entire life basically depends on what is the future environment that we are going to live in. So probabilities and evaluating the likely outcome of any future event is the proper way to have a good life. You have to constantly build, try to predict the future and build for it, build your life around that prediction. So it is very important. So therefore our forecast trader is basically a very good platform for people to come onto and see what the consensus predictions are for whatever relevant questions are important.
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B
What is your prediction tools or you more importantly, expect for the midterms in.
- [21:22]
A
The U.S. well, interestingly enough, I don't agree with this, but the prediction markets say that chances are 68% that the house will become Democratic after the midterms. And similarly chances are very high that equally high that the Senate will remain Republican.
- [21:55]
B
And when you say you don't agree with that prediction, you think he'll hold both Houses?
- [22:00]
A
I believe that chances, I'm not sure, but the chances certainly cannot be 68% that the Democrats will lean. It's crazy. So it's a very good bet to buy an O for 32 cents, right? 32 cents on the dollar. Plus you get interest at 4, 3.8% on the value of the contract. So if the contract moves in your favor, you're doing very well.
- [22:31]
B
I'm interested there because it's an area that you could argue the UK in a different format was ahead of, but we'd call it betting. And there's a big industry here before it's obviously been legalized in the US it's not as fluid as that. And I just wanted to talk about your take on some of the other countries that IBKR are pushing into and growing fast in. Is there any other nation that embraces trading broadly all types of trading as much as the United States or not?
- [23:06]
A
Well, maybe not quite as much, but certainly in Europe, England is, is one of the countries that where trading is, is very popular. And of course trading is much more popular in Asia and in the Middle East. So in the Middle east is interesting because it's a recently evolving situation there because those folks have not been as commercial as people in America or Asia have been. So yes, the Chinese people are very, very interested in trading.
- [23:51]
B
And do you foresee most of your growth in the next five years being in the US or overseas?
- [23:58]
A
I think it will be the US probably more, but it will be all over the world because let's face it, if we are right and capitalism is going to evolve everywhere and will make people richer, those people will have substantial savings and therefore they will invest. And so logic would tell you that investing will become more of a force because it's new, more of a force outside of the United States, where in inside the United Space people have been investing for a long time now.
- [24:48]
B
So I want to kind of get to our final section. Four or five questions left, Thomas, and sort of tips for our listeners. Almost, I think it's fairly rare, not totally rare, but fairly rare that you have a great technologist, a great computer scientist who is also a great leader. Do you think those require very different skill sets and which are you better at?
- [25:19]
A
So I don't know if I'm a great leader. I always had a very simple view of, first of all, I think you have to plan for the future and you have to have a plan that is rational. And as I said, my plan has always been to try to do what I already see other people doing, but try to do it better and using technology to achieve that. I just happened to land in the brokerage business, but I think that would work for anything. If you stick to your conviction and your conviction is correct, then you will eventually succeed. As long as you can do better, you can do it better than other people. And if your plans are long term and you are not disappointed or get thrown out of your track because next year maybe you are not performing as well as you expected to. So what? It's a long term that matters.
- [26:29]
B
I've seen one phrase you've used which I wanted to dwell on with you. You said people should use fewer words when they can.
- [26:40]
A
That's very true. Yes. Yes. So many times I listen to people and I just don't understand what they are saying because there's so many words.
- [26:55]
B
It's music to my ears. Thomas doing various political interviews every morning on my breakfast show on Sky News. It's if the politicians are watching, please take note of Thomas's Advice on that. The final three questions Thomas we always ask everyone, what's the best investment you've ever made?
- [27:19]
A
So I'm much more of a trader than an investor. And the way I go about my personal investments is I try to value the future prospects of companies and then I look at the current share price and the P ratio and the potential growth and I try to identify companies that are overvalued versus companies that are undervalued. So say if I see a company that's undervalued, I accumulate a position and then I start. So Internet brokers has this algorithm where you can buy accumulate a large position, especially as the stock goes down. You buy every, say every two cents down, you buy a thousand shares and then when it starts going up, you sell it at a profit and you trade it back and forth. So if the stock is undervalued, you are fairly certain that you can keep on buying the stock as it keeps still going down and accumulate a large position. And then when the stock starts going up, you start selling it. But as it fluctuates, you keep buying and selling. And so I prefer trading profits to position profits because I just like to trade well.
- [29:00]
B
It's probably why you built such a good trading product. Just the final question, Thomas, which can be when it comes to investing or being a business leader and building a business, what is your overriding piece of advice you have for for our listeners?
- [29:19]
A
I think it's important to always have a plan and to have a long term plan and to stick to it unless there is information that forces you to change it. But I think you have to have a plan.
- [29:39]
B
Thomas, it's been a pleasure. Thank you so much for joining us. It's been too long in between. I hope we'll do it again.
- [29:45]
A
Thank you very much. Thank you. Guilford.
- [29:48]
B
That was of course Thomas Petervy, the founder of Interactive Brokers. Next week we'll be joined by Larry McDonald of the Bear Traps Report, the author of how to Listen When Markets Speak. Please remember that nothing in the Master Investor Podcast should be considered direct financial advice. There's more information on that in our show notes if you want to refer to them. The Master Investor Podcast is produced by Paradine Productions and Master Investor Podcast Ltd. In association with Birdline Media. If you've enjoyed the episode, please do subscribe and give us a five star review. Thanks so much for listening.